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New Australian Guide Sets Forth How Retailers Must Adjust Prices, Mandate To Reflect Cost Reductions
May 11,2020 The Australian Competition & Consumer Commission announced new guidelines to assist electricity retailers and generators to comply with new laws aimed at protecting consumers and businesses from "excessive" electricity prices. Among other things, new laws prohibit the following conduct: • The ‘retail pricing prohibition’ prohibits electricity retailers from charging small customers prices which are not adjusted to reflect sustained and substantial cost reductions in their underlying costs.The new ACCC guidelines set out how the ACCC will interpret Part XICA of the Competition and Consumer Act 2010 (Cth) (CCA) and they explain the general approach the ACCC will take in investigating alleged contraventions of Part XICA Concerning the "retail pricing prohibition", the ACCC guidelines note as follows concerning when cost reductions must be passed on (among other criteria stated in the guidelines) Underlying cost of procuring electricity • A retailer is required to make adjustments to its prices for small customers in response to certain reductions in its ‘underlying cost of procuring electricity’. The phrase ‘underlying cost of procuring electricity’ is not defined in the CCA. • In s. 153E, the ‘cost of procuring electricity’ means the cost to the retailer of getting electricity to their small customers, and includes wholesale costs, network costs and environmental costs. Retail costs and margins are not included in the cost of procuring electricity. • The Explanatory Memorandum explains that the s. 153E prohibition is primarily concerned with sector-wide decreases in costs, rather than changes to individual retailers’ costs • The ACCC’s approach is that individual cost reductions, for example, reductions that are caused by an individual retailer’s increased efficiency, do not need to lead to price adjustments in order to comply. • However, the ACCC does not consider that cost reductions need to be across the whole of the sector to fall within the scope of s. 153E. For example, the ACCC’s approach is that a sustained and substantial reduction in network costs in a particular network region is sufficiently material such that s. 153E would apply to retailers benefitting from those reduced costs.
• When looking at sector-wide cost reductions, the ACCC will still consider the individual circumstances of a retailer, to see if adjustment of its prices in this particular instance is required. This is further addressed under the concept of ‘reasonable adjustments’ under the full guidelines
Sustained and substantial reductions • A retailer is only obliged to make reasonable adjustments to its prices when reductions in costs are sustained and substantial. • The general meaning of ‘sustained’ is something that is continuing and expected to continue. • The ACCC’s approach is that short-term fluctuations, such as normal variations in spot market prices that last only several weeks, do not require a change of retail prices. A downward trend in supply chain costs over time, however, is likely to fall within the meaning of ‘sustained’. The longer a reduction is lasting and expected to last, the more reason there is for a retailer to be considering price changes. The ACCC will take into account seasonality in wholesale electricity costs. This means that normal seasonal fluctuations in wholesale costs are not considered representative of a long-term trend. • The ACCC’s approach is that a substantial change is one which is real or of substance, relative to the overall costs of procuring electricity, though not necessarily large. This is consistent with the approach which courts have given to the word ‘substantial’ which is ‘real or of substance and not insubstantial or nominal’, ‘meaningful or relevant’ and ‘substantial in a relative sense’.
• The ACCC will not apply a set threshold in determining whether a reduction is sustained and substantial. Whether or not a reduction is considered sustained and substantial will depend on all the circumstances. Relevant factors could include, but are not limited to: the size of the reduction relative to the overall price of the retail product; the size of the reduction relative to the contribution that cost type makes to overall costs; the size of the reduction in combination with the duration of the reduction; and the factors causing the reduction
More details and several examples of what is not considered a requirement for a cost decrease are included in the full guidelines, available here
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